What is a CFO? When do you know you need one?

CFO
CFO

Businesses lately are trying to get the best possible expertise for their operations, be it marketing, finance or human resources. As a result, it has given rise to various options that earlier did not exist.

Finance alone has given rise to a lot of rewarding career prospects. The most popular ones are management consultants, stockbroker, actuary, financial manager, financial analyst and auditor. But, the one that is talked about in general is a Chief Financial Officer, also known as CFO.

The article will help you gain insights into it in a detailed manner.

What is a CFO?
Basic functions of a CFO
Are CEO, COO and CFO the Same?
When to hire a CFO?
Are CFO needed in startups?
Changing role of CFO

What is a CFO?

The Chief Financial Officer is responsible for the overall strategic financial management of a company, starting from financial planning to managing risks, record-keeping, and financial reporting to all stakeholders. In some areas, analysis is also done by a CFO because of which the title changes back to Chief Financial & Operating Officer (CFOO).

In the United, Kingdom CFO is also called Finance Director (FD). CFO/ FD directly report to the CEO of a company. CFO acts as a critical element in the proper functioning of the finance unit as the position looks after one of the most vital cause for a business to exist- to make money and profit.

In a typical startup or small business, the hierarchy works as follows:

Basic functions of a CFO

A chief financial officer has a lot to do, but the core functions that are the same in every sector are as follows:

1. Act as a Controller

CFO is held responsible for the entire management of finance in the company that means a controlling position. The officer furnishes accurate & timely data at points of strategic decision making. All stakeholders rely on this information, making it a crucial element of decision making.

2. Acts as a Treasurer

A treasurer looks into the present market threats & opportunities, and plans where to invest or divest. The capital structure of the company is also created and reviewed by the CFO. The main aim is to strike the best mix of debt, equity and internal financing.

3. Forecasts economic strategy

Forecasting proves to be an essential part of the CFO’s job description. Apart from analysing past & future, the officer is a crucial player looking forward to the upcoming potential in the market. The primary activities in this respect include identifying areas where the company is efficient and managing them perfectly.

4. Reporting

An essential function is to report the company’s financial position using different statements transparently. Thus, they act as a decision basis for parties like governments, regulatory bodies, research analysts and other stakeholders at large.

5. Proper Liquidity Management

Liquidity is required to meet your professional commitments on time and is looked after by the team directly assisted by the CFO to maintain a smooth flow of operations.

6. Focus on Return On Investment

Return is the driving force of any business, and the CFO must provide the best possible risk-adjusted return to its company. Financial planning & analysis plays a significant role in this entire arrangement where standards are compared to actual performance.

Are CEO, COO and CFO the Same?

A common misconception about executives in the C suite is popular. The terms CEO, COO & CFO are frequently used interchangeably, but there lies a vast difference in their job profiles. Let’s understand it through the following description:

CEOCOOCFO
● Highest level role●  Second highest in the Chief family● An officer looking after the finances
●  Responsible for maximising value by setting long term vision, goals and framework for the business●  Responsible for managing the entire operations● Define financial vision by assisting CEO & COO
●  Bear the entire responsibility of success or failure● Work in sync with CEO and translates vision into a plan of action● Take care of responsibilities ranging from financing daily operations to strategic investments, financial audits, budgets and forecasts, financial compliance, risk management and more

When to hire a CFO?

One of the most critical question for a CEO is when to hire a CFO?

Businesses generally find it challenging to resolve this query. The timing to hire CFO impacts all the possible decision making that comes ahead in the company.

The role is high profile and requires careful consideration. As mentioned above, the function is multi-faceted and manages both vertical and horizontal communication.

CFO services for Startups come with a high price tag, and make sure that your business can afford it.

An alternate would be to hire part-time CFO services for small business or outsource it to your accountants.

The factors that determine when to hire a CFO include:

  1. Rapid growth

A business has a life cycle, making sure that a CFO stands at starting a growth phase. Growth comes with a set of opportunities & commitments which require careful management. A CFO’s analysis will be the prerequisite in this case.

Check out our guide on Series A, B, C Funding: How It Works

2. New product development

The future of new product launches can be unpredictable, and transforming the uncertainty into a lucrative opportunity requires good work by the finance function. A careful analysis is needed like fixed and marginal costs, product costing, breakeven point and optimum cash utilisation etc. All these require input from an experienced finance professional.

3. At times of mergers & acquisitions

Strategic decisions are vulnerable as the stakes are very high. Therefore, the entire evaluation of how things will turn up shortly is shouldered upon by the CFO.  The proper communication of these details and interpretations prove to be very useful in the process Profitability at stake.

There are situations when a business faces a profitability issue, and how to improve profitability holds significant importance. CFO will analyse and come up with solutions like controlling costs, improving productivity and profitability. The in-depth review will lead to different other possible alternatives.

4. Complex tax planning

Apart from being a mandatory legal disclosure, tax obligations also prove to be a vital element of deciding business integrity. Therefore, it is the perfect time to hire a CFO as they help interpret changes in law, create tax provisions, and avail the benefits, if any.

5. Requirement of a financial model

Long term planning and strategy depend upon a financial model that an expert can only develop. A good CFO will help you build a stable model that will support the entire business processes in the most efficient manner.

Check out our guide on 15 Types of Business Models and How to Choose the Right One.

6. Visibility of future cash flows

The future cash flow is significant as it underpins future decisions. It is an excellent point to hire a CFO if invested money is not growing as expected. The investment strategy needs to be revised, keeping in mind the asset classes & objectives.

Are CFO needed in startups?

In today’s competitive environment, it’s imperative to hire CFO from the beginning to avoid any risks associated with the initial days of operations.

The appropriate growth strategy in your mind can be worked upon quite easily with a CFO on board.

Various other areas where CFO can prove to be helpful for a startup are as follows:

  1. Planning

One of the main task for a startup is to raise money. Investors love a great idea but they love an even more robust business plan and the team.

Having a CFO on board improves the credibility of your team, financial forecasts and business valuation.  

CFO will help you get a hold of the financial position and present a future vision through in-depth evaluation.

Check out our guide on What is a business model & how do I build one?

2. Efficient fund management

Often investors are concerned that their money will be wisely spent. As funds are a scarce resource initially, even if they are in abundance, the costs become relatively high. With CFO in your team, you can rest assured that every penny will be spent wisely.

Check out our guide on How to Pitch Your Business Idea to Investors?

3. Timely reporting and statutory obligations

CFO ensures that all statutory obligations are met on time. CFO may not prepare the set of accounts or submit monthly RTI. However, a CFO will ensure that robust processes are in place to meet all statutory obligations in time.

Check out our top tips for meeting your accounting deadlines effectively.

Changing role of CFO

Undoubtedly, CFO’s traditional tasks are essential for business functioning, but now the demands of a CEO have undergone a drastic change. It is no longer a mundane job description; instead, it looks after challenging and uncertain business aspects.

With technological advancements, the role of the CFO is evolving. CFO is also expected to manage stakeholder expectations, align inter-departmental cohesion, explore investment opportunities, capital rationing, increasing revenue streams  and make Finance a dynamic, forward-looking function in the company. 

Roles of CFO

The desired skill set is constantly changing, making it a prerequisite for the businesses to understand the changing role that CFO’s can play in their financial position.

Finance is embedded throughout the company.